Interest rates are on the rise, but the S&P 500 Index still yields just 1.6% on average. For many investors, such as retirees, this simply is not enough income. Investors looking for higher levels of income should consider high dividend REITs.

REITs typically own real estate properties that are leased out to tenants. With the cash flow from rents, REITs invest the proceeds in acquiring new properties. This creates a steady stream of growth over time, which then allows REITs to distribute a high level of cash to shareholders. The result is that REITs can be a passive investment for income.

The following 3 REITs have strong business models, and currently have dividend yields above 6%.

SL Green Realty (SLG)

SL Green Realty Corp. (SLG) was formed in 1980. It is an integrated real estate investment trust (REIT) that is focused on acquiring, managing, and maximizing the value of Manhattan commercial properties. It is Manhattan’s largest office landlord, with a market capitalization of $2.2 billion, and currently owns 60 buildings totaling 33 million square feet. 

In late January, SLG reported (1/24/2024) financial results for the fourth quarter of fiscal 2023. Its same-store net operating income grew 3.9% over the prior year’s quarter and its occupancy rate edged up sequentially from 89.9% to 90.0%. However, due to some assets sales and special administrative expenses, funds from operations (FFO) per share fell -51% over the prior year’s quarter, from $1.46 to $0.72, missing the analysts’ consensus by $0.19. 

SLG benefits from long-term growth in rental rates in one of the most popular commercial areas in the world, Manhattan. The REIT pursues growth by acquiring attractive properties and raising rental rates in its existing properties. It also signs multi-year contracts (7-15 years) with its tenants in order to secure reliable cash flows. SLG has grown its funds from operations per share at a 3.0% average annual rate in the last decade.

SLG is under pressure due to the work-from-home trend, which has resulted from the pandemic. However, it has a decent balance sheet, with a healthy BBB credit rating. However, it has a decent balance sheet, with a healthy BBB credit rating. 

As a result, it can endure the ongoing crisis and emerge stronger whenever the work-from-home trend subsides. It can also maintain its attractive 6.5% dividend, which is well covered by cash flows, with a healthy payout ratio of 50%. SLG is thus suitable for income-oriented investors who can wait patiently for the recovery of the REIT from the pandemic. SLG stock yields 7%.

EPR Properties (EPR)

EPR Properties is a specialty real estate investment trust, or REIT, that invests in properties in specific market segments that require industry knowledge to operate effectively. It selects properties it believes have strong return potential in Entertainment, Recreation, and Education. The REIT structures its investments as triple net, a structure that places the operating costs of the property on the tenants, not the REIT. The portfolio includes about $7 billion in investments across 300+ locations in 44 states, including over 250 tenants. 

EPR reported third quarter earnings on October 25th, 2023, and results were better than expected on both the top and bottom lines. Funds-from-operations came to $1.47 per share, which was eight cents better than expected. Revenue was $189 million, 17% higher year-over-year, and better than estimates by almost $26 million. The company said it continues to see ongoing stabilization in its portfolio, as well as stronger box office sales, and a master lease agreement with Regal, a large movie theater tenant.

For many years, EPR enjoyed exceedingly high occupancy rates, which afforded it pricing power and higher margins over time. The coronavirus pandemic upended many of EPR’s tenants, but with the pandemic in the past, EPR’s exposure to experiential parts of the economy is a growth driver. Recent results seem to indicate that the worst is behind EPR, and the Regal restructuring is a big step forward.

We are forecasting the payout ratio to decline to 71% of AFFO by 2028, which is in line with most years in the past decade. EPR’s competitive advantage is its portfolio of specialized properties. EPR has methodically identified the most profitable properties through years of experience and focuses its investments in these areas.

EPR stock currently yields 7.6%.

Innovative Industrial Properties (IIPR)

Innovative Industrial Properties, Inc. is a single-use “specialty REIT” that exclusively focuses on owning properties used for the cultivation and production of marijuana. Because the industry is in the midst of a legal transition, there are constraints on capital available to businesses engaged in the marijuana business. The REIT owns 108 properties in 19 states. 

On November 1st, 2023, Innovative Industrial announced its Q3 results for the period ending September 30th, 2023. For the quarter, revenues and normalized AFFO/share were $77.8 million and $2.29, up 9.8% and 7.5%, respectively. The company's growth was primarily driven by an increase in tenant reimbursements compared to last year, as well as activity in prior periods for the acquisition and leasing of new properties. 

Additional building infrastructure allowances provided to tenants at certain properties that resulted in increases to base rent and contractual rental escalations at certain properties also boosted results. 

As of September 30th, 2023, 98.5% of IIPR's properties were leased with a weighted average remaining lease term of approximately 14.9 years. The company collected 97% during the quarter.

Industrial Innovating Properties has seen AFFO/share grow dramatically since the trust’s IPO. To capitalize on the growth of the cannabis sector, IIPR acquired 37 and nine properties in 2021 and 2022, respectively. With cannabis steadily being legalized across states, we expect to see the current growth rates sustained in the medium term.

Despite the company’s high payout ratio above 80% of FFO, we believe the dividend should remain well-covered. Regarding its qualities, being the only listed pure-cannabis REIT, the company has a massive moat. With access to public markets, management can issue debt and equity much cheaper than its few private competitors. IIPR can build more durable and sustainable relationships with tenants as it possesses higher credibility and transparency. IIPR stock currently yields 8%.